The top five unlearned lessons of the financial crisis

In capital we trust. Capital is our savior, our holy grail, our fountain of youth, or at least health, for banks. Seriously, how many times have you read that more capital will save the banks from another Armageddon? Even the banks point to capital as a reason to have faith. “Financial institutions have also been working alongside regulators to make themselves and the financial system stronger, more transparent, more resilient and more accountable,” wrote Rob Nichols of the Financial Services Forum, which is made up of the chief executive officers of 19 big U.S. financial institutions. “Specifically, capital, which protects banks from unexpected losses, has doubled since 2009.” If you were a cynic — who, me? — you might say that the mere fact that the banks are pointing to capital is proof that capital is not all that.

Everyone seems to be ignoring the basic fact that capital isn’t a pile of cash. It’s an accounting construct. On his Interfluidity blog (which I found courtesy of Naked Capitalism), Steve Waldman writes, “Capital does not exist in the world. It is not accessible to the senses. When we claim a bank or any other firm has so much ‘capital,’ we are modeling its assets and liabilities and contingent positions and coming up with a number. Unfortunately, there is not one uniquely ‘true’ model of bank capital. Even hewing to GAAP and all regulatory requirements, thousands of estimates and arbitrary choices must be made to compute the capital position of a modern bank.” In other words, even if you give bankers credit for good intentions, the accounting that would truly capture “capital” may not exist. Or as Waldman writes, “Bank capital cannot be measured.” Layer in some real world realities. The next time things get tough, will regulators once again practice forbearance and allow firms to overstate their capital, which has the perverse effect of making no one trust reported capital? Let’s not forget Lehman, which according to Lehman had a very healthy Tier 1 ratio of 10.7 percent on May 31, 2008 and a total capital ratio of 16.1 percent. This didn’t matter, because no one believed Lehman’s capital was real.

On the list of cures for the sick financial system, the concept of “risk retention” ranks right behind capital — but there are a couple of neat little twists here. The narrative of the crisis is that because mortgages could be sold off to banks, who would turn them into securities and sell those on to investors, who thought they were buying triple-A paper courtesy of the rating agencies — well, no one had any incentive to care about credit quality. In a piece in the Wall Street Journal entitled “How to Create Another Housing Crisis,” MFS Investment Management’s former chairman Robert Pozen writes, “With ‘no skin in the game,’ the originators had little incentive to determine whether the borrower was likely to default.” As a result, one provision of Dodd-Frank requires securitizers of any asset, not just mortgages, to retain 5 percent of the risk of loss. Barney Frank has said that the risk retention rules are the “most important aspect” of the legislation that bears his name.

The first twist is how risk retention became risk liberation. The housing-industrial complex went to work. Into Dodd-Frank went a provision that certain “safe” mortgages, called qualified residential mortgages, or QRMs, would be exempt from the risk retention requirement. “Safe” was left to the regulators to define. Cue more lobbying. The rules finally proposed in late August would exempt, according to a Wall Street Journal piece by Alan Blinder, some 95 percent of mortgages from the risk retention requirement. In other words, the very asset that most people believed led to the credit crisis is also the asset that is pretty much exempt from the new rules! Classic. In the joint announcement on August 28, the regulators wrote, “The Commission acknowledges that QM does not fully address the loan underwriting features that are most likely to result in a lower risk of default. However, the agencies have considered the entire regulatory environment, including regulatory consistency and the possible effects on the housing finance market.” (That last bit is super scary.)

That said, the real twist here is that risk retention is no silver bullet. After all, firms like Countrywide, Washington Mutual, Merrill Lynch, AIG and Citigroup went under or almost went under precisely because they retained so much risk on their own balance sheets. Malevolence is only part of the problem with our financial system. The other problem is sheer stupidity.

• Bethany McLean is a contributing editor at Vanity Fair, and co-author with Joe Nocera of "All the Devils are Here: The Hidden History of the Financial Crisis." Her first book, "The Smartest Guys in the Room," co-written with Peter Elkind, became an Academy Award-nominated documentary. 

So today is the day.  After weeks of near-constant coverage of the big decision — will JPMorgan Chase shareholders keep Jamie Dimon as chairman and CEO or relegate him to just CEO? — the verdict came at JPMorgan’s annual meeting in Tampa, Florida:  Dimon gets to keep both titles. The next question is whether the result will get as much press as the original question did. The subject has gotten so much coverage in part because Dimon is so divisive. To his supporters, he’s the personification of everything that’s best about the financial system. Those who defend Dimon, like New York Times columnist Andrew Ross Sorkin, point out that JPMorgan Chase hasn’t lost money in any quarter while Dimon has been in charge. Others, including Warren Buffett, Jack Welch, Michael Bloomberg and Rupert Murdoch, praise Dimon, who is often called “America’s most famous banker,” for his management skills. But to detractors, he’s the personification of all that’s wrong with modern banking — the arrogance, the resistance to new regulation, the astronomical pay in the face of obvious mistakes. The way he acted — threatening to resign entirely if his chairmanship was taken away — is proof that he’s no more than a spoiled child.
But I wonder if the vote has gotten so much attention for another reason, which is that it’s easier to chew over Jamie Dimon than it is to think about the right structure for our financial system. Sure, the management, and the structure of that management, at JPMorgan matters.  But if I were a conspiracy theorist ‑ and really and truly, I’m not! ‑ I might even suspect that all the fuss about Dimon is supposed to make us “watch the birdie.”  It’s a distraction, meant to deflect attention from the real point, which is how we structure a financial system that best serves the needs of consumers and businesses in as safe a way as possible.
We’ve been getting close to having that conversation lately.  In late April, Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.) rolled out the Brown-Vitter bill , which some have called the “break up the big banks” bill because the capital requirements it would impose on large banks, those with over $500 billion in assets, are so onerous as to force a breakup. At the least, the bill is a start to a much-needed conversation — or it was until Dimon began to dominate the headlines.
JPMorgan, which is the nation’s largest financial holding company with $2.4 trillion in assets, is not only one of the central targets of Brown-Vitter, it’s also a cause of the bill.  That’s not just because JPMorgan is big. Last summer, as most people know, JPMorgan lost more than $6 billion because of a trade in credit derivatives gone wrong. (The bank still made money that quarter.) Dimon, who initially and famously dismissed rumors as a “tempest in a teapot,” was forced to testify twice in Washington, and to offer a rare mea culpa, not once but repeatedly, for what he called a “terrible mistake.”
Just before Brown and Vitter produced their bill, in mid-March, the Senate Permanent Subcommittee on Investigations finished a report on JPMorgan’s big loss.  The trades “provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system,” wrote the PSI. “They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers and the taxpaying public who, when banks lose big, may be required to finance multi-billion-dollar bailouts.”  OK, then!
Around the same time, Joshua Rosner, a managing director at independent risk consultancy Graham Fisher & Co., wrote a report called “JPMorgan Chase: Out of Control.”   He noted that since 2009, JPMorgan has paid more than $8.5 billion in settlements for various regulatory and legal problems.  That amount represents almost 12 percent of the net income the firm has produced from 2009 to 2012, according to Rosner, who also alleges that “many of JPM’s returns appear to be supported by an implied guarantee it receives as a too-big-to-fail institution.”
These are huge issues that everyone should be concerned about. But inadequate risk management, derivatives exposure, incentives to put excess money to work by making trades rather than loans and a torrent of legal issues aren’t — unfortunately — unique to JPMorgan Chase. We’ve created a Frankenstein of a financial system, one that is manmade but often so complex that it can eclipse our ability to measure or manage it. Add to that the constant pressure for profits and the opportunities to arbitrage an increasingly prescriptive, expensive set of rules and regulations.  It’s a toxic combination.  Plus, we live in a world where size and money equals political power, making effective oversight difficult. Would replacing Jamie Dimon as chairman help? A Wall Street Journal story quoted Michael Garland, who is an assistant comptroller for New York City and a co-sponsor of the shareholder resolution to split the roles, saying that an independent chairman would have more time than Dimon to deal with unhappy regulators. Great: more placating and handholding. Garland also says that it would send a strong message to the bank that the board needs to strengthen its oversight. Raise your hand if you think there’s a board out there that truly can oversee a modern financial institution.
It would be nice if all of this were fixable by adding or swapping the players at JPMorgan. But does anyone believe that if JPMorgan had had another chairman during this period — say, Bill Harrison, who was the bank’s CEO before Dimon — that last summer’s derivatives losses wouldn’t have happened? If JPMorgan had a different CEO, that wouldn’t make the issues go away. Arguably, it would make things worse.
Dimon certainly hasn’t navigated the fraught world of big banking perfectly. But name one person who has. The world’s next great banker might be being groomed inside or outside JPMorgan, but for now, if we’re going to live with the banks we’ve got, I’ll take Dimon over Dimon-lite.
The problems with JPMorgan aren’t a result of who the people are or aren’t at JPMorgan. They’re a result of the system. And while it may or may not make sense to change the people, don’t be deluded:  That’s not changing the system.

lets hear chin's opinion since this is about investment and banking.

(Reuters) - Men's Wearhouse Inc ( MW.N ) struck back at Jos. A. Bank Clothiers Inc ( JOSB.O ) with a $1.5 billion bid to acquire the suit and tuxedo retailer, only weeks after rejecting a takeover offer from its smaller rival.
Men's Wearhouse, under pressure from activist shareholders to merge, offered $55 per share in cash for Jos. A. Bank, a offer that values the smaller retailer's stock at a 9 percent premium to its close on Monday.Jos. A. Bank shares rose as much as 12.5 percent on Tuesday to a two-and-a-half year high of $56.91, topping the offer in a sign investors might be expecting a better bid. Men's Wearhouse shares rose as much as 12 percent to a year-high."For the shareholders of Men's Warehouse and for Jos. A. Bank, Christmas has come early. They will see huge benefits to the merging of these two companies," said Jerry Reisman, an M&A expert at law firm Reisman Peirez Reisman and Capobianco LLP.

The combined company would have 1,700 stores that rent tuxedos and sell suits, a scale that in the past has raised antitrust questions about a merger.The retaliatory offer from Men's Wearhouse, which the company said implies an enterprise value of about $1.2 billion for Jos. A. Bank, follows pressure from its largest shareholder, New York-based hedge fund Eminence Capital LLC.Eminence, along with other hedge funds that hold about 30 percent of Men's Wearhouse shares, had tried to persuade other investors to pressure the company into accepting the takeover offer from Jos. A. Bank."We are pleased to see that the board of Men's Wearhouse agrees with us and recognizes the substantial benefits of merging with Jos. A. Bank," said Eminence Chief Executive Ricky Sandler.

The last person to push Men's Wearhouse to sell itself was its founder, George Zimmer, known to U.S. television audiences for his advertising catch phrase, "You're going to like the way you look - I guarantee it."Zimmer was ousted by the board in June after arguing for a sale of the company to an investment group. At the time, he accused the board of trying to silence him for expressing concerns about the direction of the company he founded 40 years ago.Men's Wearhouse is serious about acquiring Jos. A. Bank and is not simply trying to force the company to raise its bid for Men's Wearhouse, according to sources familiar with the process.